Elliott Wave: Dow 1,000 Here We Come?

by Darwin on July 9, 2010

There are often obscenely optimistic, pessimistic or outright ridiculous titles to get clicks in major financial outlets and the vast majority of the time it’s complete bunk. From the book Dow 36,000 to predictions of gold prices at astronomical levels, it’s a game of one-upmanship to see who can devise the most outrageous theorem and use some estimates and historical black swans to make the numbers fit the title. Well, this week, the New York Times ran an article on a chartist predicting that the Dow will drop below 1,000, losing over 90% of its value over the next several years. That’s right, a 90% correction from here.

On one hand, you’ve gotta question why someone like this even gets any press, but on the other, what if he’s right? And he does hold some legitimacy in trading circles as the head of Elliott Wave International and heads the Market Technicians Association. In decades past, Elliott Wave theory caught on by predicting trends in the market based on technical analysis, but logic and history dictate that more recently, the predictions are not as accurate given the vast amount of information available to all participants and the notion that “if everyone can predict it, it would have happened already” right? If you knew with high assurance that the market would be 20% lower in a month, wouldn’t you be selling already instead of next month?

How to Invest in Dow 1000 Scenario

The best way to invest is to not really invest at all under a scenario like this. If we encounter a situations where prices decline precipitously, you’d want every dollar you have at your disposal within your possession. In a deflationary environment, just having cash under the mattress is earning a positive return when all other asset prices are declining. This is hard to envision since most of us have never seen a truly deflationary environment for a sustained period of time. However, note that those holding cash from the lows of last march missed a nice upward move in excess of 60% from the bottom. Some joke that the best investment would be a gun and lots of bottled water since it would mean the world has pretty much come to an end.

Could Dow 1000 Really Happen?

Well, anything can happen. But technical mumbo-jumbo aside I don’t see how such a scenario is plausible, even under a double-dip recession scenario. For equities to be worth 10% of their current value, dividend yields would become astronomical (for those companies still paying out a dividend) and with companies with any earnings whatsoever (surely there would be some), their price-to-earnings ratios would be so low that savvy investors would be forced to continue buying at those values. There’s a natural ebb and flow of buying and selling in a free market, with overshoots in between, as we saw during the financial collapse. When it was evident that Armageddon was not upon us, stocks rocketed back within months. I do envision if the economy falters, unemployment stays high and we enter a new Recession, it’s plausible that stocks decline substantially again, but they’ll be back. Much of the bad news is currently baked into stocks now. And I don’t make predictions on “price targets”, but I will predict what WON’T happen – Dow 1000.

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I disagree with your prediction. I’m not saying it WILL happen. I just disagree with any statement like “XX Won’t Happen” when it comes to the stock market. We have absolutely no way of predicting what will happen.

Half the time I “predict” something for the market, I’m wrong. I just need to figure out which half is the right half.